Declines have been greater than anticipated. Certainly weather has contributed to that, but likely not weather alone.

Seeing some signs in March that make us feel a bit better about the business.

Argentina

Had assumed in 2014 that the restrictions would not improve.

In fact, the importation situation has tightened in Argentina

See a fraction of those units shipping into Argentina in 2014.

Cost Cuts

$30MM cost reduction in 2014 ($50MM annualized)

Powerbucks

Nevada, New Jersey, South Dakota and Canada opportunities

DoubleDowns

Growing 20%

Systems

Will experience the same sort of growth (asDoubleDowns)

Replacement Cycle

Coming into the year, replacement units were expected to grow. It looks now like they will not grow.

Product Sales

Product sales is probably been disproportionately impacted given the effects now that we see on the market on replacement demand, on international market demand.

Game Ops

Increased pressure on MJP (Megajackpots)

Stock Repurchase

Concluded the previously announced accelerated share repurchase in January. That actually is an impact in the quarter. But in terms of material repurchase, activity was largely concentrated in the first quarter.

IGT will be less aggressive on the buyback front in the short term

2015/2016

Expect to deliver earnings growth in both 2015 and 2016 at this point.

FX

Facing a bit of a forex headwind. Three major external currencies outside the euro in South Africa, in Argentina and Australia have all moved against IGT, Argentina obviously very dramatically in the year. There will be a devaluation charge in the quarter associated therewith. IGT expect those to moderate at some level.

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04/21/14 03:06 PM EDT

Just Charts: Earnings Season Heats Up

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list). We intend to update this table regularly and will provide detail on any material changes.

Consumer Staples mildly underperformed the broader market last week, rising 1.5% versus the S&P500 at 1.7%. XLP is up 1.5% year-to-date vs the SPX at 0.9%; the coming week is marked by a number of earnings releases.

For a seventh straight week, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.

The Hedgeye U.S. Consumption Model shows a worsening outlook over recent weeks, with only 3 of the 12 metrics flashing green.

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing

The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth

The sector is loaded with a premium valuation (P/E of 19.2x)

Less sector Yield Chasing as Fed continues its tapering program

The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, but improved to -29.1 versus -31.9 in the prior week

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

BUD – the King of chasing low-beta-slow-growth-yield is back! Confirmed now for almost a month, BUD is back above its TREND line of $105.48

DEO – is not the King of Beers – still bearish TREND @Hedgeye with $129.34 resistance

KO – big move on a big price/volume breakout last week; KO back above its $39.59 TREND line

PEP – bullish TREND support of $83.14 confirmed last week on a big price/volume move out of earnings

Nike Gets Less Active, Fires FuelBand Team | $NKE

"Nike is gearing up to shutter its wearable-hardware efforts, and the sportswear company this week fired the majority of the team responsible for the development of its FuelBand fitness tracker, a person familiar with the matter told CNET."

"The company informed members of the 70-person hardware team – part of its larger, technology-focused Digital Sport division comprised of about 200 people – of the job cuts Thursday. About 30 employees reside at Nike's Hong Kong offices, with the remainder of the team at Nike's Beaverton, Ore., headquarters."

"It's unclear how many current employees, if any, have been internally recruited to join other Nike divisions. Nike Digital Tech, responsible for Web software, was not affected."

"As CNET reported on April 10, Nike had serious discussions in the last few months –after the release of the FuelBand SE tracker last November – about exiting the wearable-hardware market. The shoemaker isn't throwing in the towel on technology. Rather, it's turning away from hardware and realigning its focus exclusively on fitness and athletic software…"

Takeaway From McGough:

Nike is officially pulling the plug on its wearable tech initiatives. The announcement isn't all that surprising given that the FuelBand and Nike + SportWatch trail the offerings currently on the market – FitBit, Jawbone, Garmin, etc. – by a wide margin. It doesn't appear that the company is throwing in the towel all together, instead shifting its focus from hardware to software.

Let's be clear about one thing, Nike's software leaves a lot to be desired; the Fuel Point metric is an arbitrary calculation that doesn't translate to other fitness devices. If Nike outsources hardware to a third party – which it appears that it will given the new software-focused Nike + Fuel offices in San Francisco – perhaps it can focus its energy where it has some expertise (i.e., digital media as opposed to digital hardware) and close the gap with its competitors.

* * * * * * *

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow McGough on Twitter @HedgeyeRetail.

VIDEO | McCullough: How Investors Should Position Themselves Now

Monday Mashup: CMG, WEN and More

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating. We intend to update this table regularly and will provide detail on any material changes.

EAT – We're pulling Brinker from our long list. The stock has acted well for us over the past year, but the departure of CFO Guy Constant, declining traffic trends and rising food costs are beginning to concern us.

MCD – We’re relegating McDonald’s to the short watch list. We removed it from our Best Ideas list back in mid-February amid concerns of a potential financial engineering event. It could be through refranchising or a leverage event, we’re not quite sure, but we don’t want to be in the way. We still believe the McDonald’s business is in secular decline, but there are several reasons, including easy comparisons and an attractive dividend, that give us reason to believe the stock has support.

BWLD – We’re relegating Buffalo Wild Wings to the short watch list. While we believe the stock is fully valued, we see very few short-term catalysts that suggest near-term downside. Declining new unit sales performance, ROIIC, and CFFO/Net Income are three metrics that make us bearish, but we believe the company has enough near-term drivers to support the stock.

Chart of the Day

WEN trades at a discount to BKW and YUM and in-line with a market-saturated MCD despite having significantly more runway to improve revenues, margins and returns. Despite strong performance in 2013, Wendy’s continues to be an out of favor name giving value-oriented investors a compelling opportunity. We expect to see meaningful multiple expansion as Wendy’s continues to reimage its restaurants, rebalance its franchise mix and generate stronger returns.

Recent News Flow

Monday, April 14

PLKI announced the resignation of CFO Melville Hope, who plans to depart in May to pursue opportunities. The company has begun a search for his successor.

Tuesday, April 15

SBUX announced the relocation of its European headquarters from the Netherlands to the UK

SONC upgraded to buy at Sterne Agee with a $25 PT

Wednesday, April 16

TAST announced it will hold a secondary stock offering to raise $60 million. The proceeds are expected to be primarily used to accelerate the 20/20 restaurant reimage program and acquire franchised restaurants.

Thursday, April 17

CMG reported a strong quarter with same-store sales up 13.4%, primarily driven by traffic. Despite this, the company is seeing margin compression from rising food costs and announced plans to take mid-single digit price beginning at the end of 2Q14. Chipotle continues to take market share in an increasingly competitive environment.

XLY Quantitative Setup

The XLY (+1.0%) underperformed the SPX (+1.7%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the broader XLY benchmark. From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.

Casual Dining Restaurants

Quick Service Restaurants

Howard Penney

Managing Director

Fred Masotta

Analyst

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